manual accounting basics
TRANSCRIPT
Manual Accounting Basics
BSBFIA401 Learner Guide Version No. 1.4
Page 2 Australian College of Business and Accounting
Table of contents
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TABLE OF CONTENTS ........................................................................................................ 2
1. WHAT IS ACCOUNTING? ............................................................................................... 3
1.1 Accounting Standards ............................................................................................. 3 1.2 Accounting Systems ............................................................................................... 4
2. ACCOUNTING ELEMENTS, EQUATION AND RULES .......................................................... 7
2.1 Basic Accounting Equations .................................................................................. 12 2.2 The Extended Accounting Equation ...................................................................... 13 2.3 A Note about Debtors and Creditors ..................................................................... 15
3. TRANSACTION ANALYSIS ............................................................................................ 17
4. GOODS & SERVICES TAX (GST) ................................................................................. 24
5. ACCOUNTING PROCESSES .......................................................................................... 29
5.1 The Accounting Cycle ........................................................................................... 29 5.2 Source Documents ............................................................................................... 29 5.3 Journals ................................................................................................................ 30 5.4 Ledgers ................................................................................................................. 42
6. TRIAL BALANCE .................................................................................................... 58
6.1 Preparing Trial Balance ........................................................................................ 58 6.2 Correcting Errors in Trial Balance ......................................................................... 59
7. GLOSSARY OF ACCOUNTING TERMS ........................................................................... 62
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1. What is Accounting?
Accounting is the process of recording and calculating financial transactions for a business,
including analysing, summarizing, clarifying, noting, and storing for reporting and
interpretation purposes.
Accounting presents the profit and loss of a business considering the value of assets,
liabilities, owner’s equity, revenue, and expenses – this will be explained in further detail in
the coming sections.
Modified from: Business Dictionary, “Accounting”, http://www.businessdictionary.com/definition/accounting.html
Accessed on 1/10/2010.
Some of the principle objectives (functions) of accounting include:
• Providing information to decision makers and stakeholders
• Ensuring financial records are accurate
• Assisting in evaluating the performance of a business
1.1 Accounting standards
For the Australian economy, the Australian Accounting Standards Board (AASB) is the
governing body determining and enforcing the standards applicable for financial reporting in
both the public and private, and the for-profit and not-for-profit sectors.
More information on the AASB can be found on their website at the following web address:
https://www.aasb.gov.au/. The AASB is governed by Australia’s corporate regulator, the
Australian Securities and Investments Commission (ASIC), and must comply with the
legislation outlined in the Australian Securities and Investments Commission Act 2001.
Further information on the Act can be searched for on the website of the Federal Register of
Legislation at this address: https://www.legislation.gov.au/.
The AASB uses the Conceptual Framework for Financial Reporting (also known as the
Conceptual Framework) to provide guidance on the concepts and purpose of financial
reporting. The Conceptual Framework has tabled the elements of financial reports whereby
more information can be sourced from the AASB website at the following address:
https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx.
From the frameworks and guiding principles, organisations determine the most appropriate
accounting system and processes for their business, in line with government requirements.
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1.2 Accounting systems
An accounting system can be maintained manually or with the aid of a computerised
platform.
Manual accounting system
A manual accounting system is where transactions are recorded by hand or is not
automated. This may be either with paper or even a spreadsheet. The process from source
document to financial statements are completed as steps in the accounting process. The use
of a computer does not immediately imply that we have an ‘electronic’ or automated
accounting system.
Electronic accounting system
An electronic accounting system makes use of the speed of computing systems and
software to process the day-to-day transactions as they are entered into the general ledgers
immediately. The important distinction is that an electronic accounting system captures and
automates the accounting process from a source document to the preparation of financial
statements. A computer is not an electronic accounting system as it is merely hardware. It is
the software that is used (e.g. MYOB or Xero) that provides the system infrastructure to call
it an accounting system.
There are several computerised accounting systems software such as Intuit QuickBooks,
Xero, Fresh Books, Sage, etc; however, the accounting system used in this course is MYOB.
The following table outlines the key differences between a manual and computerised
accounting system:
Manual Computerised
Definition Transactions are recorded and
kept in physical registers of
journals and ledgers.
Transactions are recorded
digitally using appropriate
software.
Calculations and
errors
Calculations are done manually
and are vulnerable to human
error.
Calculations are done using the
computer system, and errors
are minimised.
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Ledger Accounts
and Financial
Statements
Manual posting is done to
properly classify accounts.
Financial statements can only
be generated after the
preparation of a trial balance.
Posting is automatically done
after the transaction entry. Trial
balances and financial
statements are automatically
prepared by the system.
Cost Relatively cheaper than a
computerised system.
Initially, more expensive than a
manual system.
Benefits of Integrated Computerised Accounting Systems:
• Speed: Data entry can be carried out faster than manual processing because of the
computer’s formatted screens and built-in databases of customers, supplier details,
and stock records
• Cost: Computerised accounting programs reduce time entering and preparing
accounts and audit expenses as records are structured, up-to-date, and accurate
• Accuracy: There is less room for errors as only one accounting entry is needed for
each transaction rather than two (or three) for a manual system. The accounting
system may also have internal checks and balancing that will ensure that incorrect
entries are not processed
• Information management: Reports can be produced which will help management
monitor and control the business; for example, the aged debtor’s analysis will show
which customer accounts are overdue, trial balance, trading and profit and loss
account, and balance sheet
• Integrated system: When a business transaction is entered into an electronic
accounting information system, it is recorded in several different accounting records
at the same time
1.3 Key features of an accounting system
It is important to understand the key features of an accounting system including the
fundamental principles which are applied.
Basis of Accounting: Cash vs accrual basis
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The main difference between these two lies in the timing of recognition of revenues and
expenses. A cash basis of accounting only recognises income when there is an actual
inflow of cash, and expenses when there is an actual outflow of cash.
With the accrual basis of accounting, income is recorded at the time of the event,
regardless of when the actual cash is received. The accrual basis of accounting thus gives
rise to accounts receivable and accounts payable. Accrual basis is the more common
method used by businesses.
Entry System of Bookkeeping: Single-entry vs double-entry bookkeeping
The single-entry method of bookkeeping maintains records in which a single entry is made
for every transaction. The entry contains only one account and primarily keeps track of the
movement of cash. There is no full record-keeping in accordance with the Generally
Accepted Accounting Principles (GAAP). A reconciliation of accounts is not possible using
this method, and the possibility of errors and fraud are very high.
The double-entry method of bookkeeping, on the other hand, records transactions based
on the principle of duality; that is, for every journal entry credit there is an equal journal entry
debit. It fully records the effects of every transaction in the accounts in the chart of accounts,
making reconciliation possible, and agrees with GAAP. It is the method most businesses
adapt.
Debits and credits
This will be explored in detail in Basic Accounting Equations section.
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2. Accounting elements, equations, and rules
Accounting processes the transactions related to running a business. The nature of the
business and the products or services being sold will determine the focus of the accounting
system reporting. For example, while all businesses will report revenues, expenses, and net
profit, the financial accounts of a manufacturing business will differ somewhat from the
financial reports of a legal firm.
Five main types of accounts
All accounting systems (manual and computerised) use the five main groups of accounts:
Assets, Liabilities, Owner’s Equity, Revenues and Expenses:
Assets
Assets are items of value that a business owns and that will be used in the business to
provide a future economic benefit. These items can be physical/tangible (such cash,
equipment, and property), or non-physical/intangible (such as certain intellectual property
rights e.g. patents and trademarks). Assets also include amounts owed to the business by
customers for prior sales on short-term credit (accounts receivable or debtors) or amounts
the business may have loaned to others and are legally repayable. For a more exhaustive
list of possible assets, see the Chart of Accounts in section 2.1.
Liabilities
Liabilities are monies legally owed by the business. These can include loans taken out by
the business, money owed to suppliers for purchases on short-term credit (accounts payable
or creditors), or money owing to the government for taxes (income tax, GST etc). As a rule,
you can assume that if an account name includes the descriptor ‘payable’, then it contains
liability. For other examples of liabilities, see the Chart of Accounts in section 2.1.
Owner’s Equity
Equity is what would be left over if a business or organisation sold all the assets and paid off
all the liabilities. Owner’s Equity is the net value of the business to the owner. Owner’s
Equity is made up of the owner’s investments (including cash and other assets) into the
business through the ‘Capital Account’ and the amounts taken out of the business for
personal use through the ‘Drawings Account’. Owner’s Equity also includes any retained
profits (i.e. Revenues less Expenses).
Revenue
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Revenue is the money flowing into the business from trading such as sales of merchandise
or services. It can also include other amounts the business receives such as revenue from
rent property, interest on bank accounts, or commissions. For other examples of revenues,
see the Chart of Accounts in section 2.1.
Expenses
Expenses are the day-to-day operating costs of the business. Typically, they include
electricity, wages, repairs, bank charges, business vehicle costs etc. Expenses can also
include assets or supplies that are consumed or used up while earning income. For
example, stationary supplies (paper, pens, staples) fulfil the definition of an asset but as
these items are consumed in the normal course of business, they are correctly classified as
expenses. For some more examples of expenses, see the Chart of Accounts in section 2.1.
• Cost of Goods Sold (sometimes called Cost of Sales or COGS) is a special type of
expense that is directly related to producing and delivering goods/services. For a
retail business, COGS is the amount paid (cost) to purchase merchandise before it is
on-sold to customers. In a manufacturing business, COGS include all the raw
materials used to create the finished product before sale.
• The Cost of Goods Sold can be shown as a separate account, or a calculation
derived from other accounts. Regardless of which approach is used, the cost of
goods sold is reported separately from other general expenses such as electricity,
rent, telephone etc.
• The Purchases Account is a special type of expense account associated with the
cost of goods sold.
2.1 Chart of Accounts
The chart of accounts is a list of all the accounts relevant to that business. These are
generally grouped into the five main accounts of Assets, Liabilities, Owner’s Equity,
Revenues and Expenses. Within the major account groups, there are often additional
subcategories which allow for more meaningful reporting of information in financial reports.
The chart and types of accounts assist in the core and fundamental principle of accounting –
reporting of transparent, reliable financial and economic information to make a decision.
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Real World Chart of Accounts Example (Extracted)
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Practice exercise 1: Identifying the type of account
Tick the correct column to indicate the account type.
Account Name Asset Liability Owner’s Equity
Revenue Expense
Creditors (Ac payable)
Bank charges
Advertising
Furniture
Bank Loan
Rent paid
Capital
Cost of goods sold
Bank Cheque Account
Commission received
Computer supplies
Debtors (Ac receivable)
Credit/debit card fees
Telephone charges
Vehicle repairs
Machinery
Sales
Electricity
Drawings
Rent received
Commission paid
Building
Loan to Bill Smith
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Practice exercise 1 Solution
Account Name Asset Liability Owner’s Equity
Revenue Expense
Creditors (Ac payable) X
Bank charges X
Advertising X
Furniture X
Bank Loan X
Rent paid X
Capital X
Cost of goods sold X
Bank Cheque Account X
Commission received X
Computer supplies X
Debtors (Ac receivable) X
Credit/debit card fees X
Telephone charges X
Vehicle repairs X
Machinery X
Sales X
Electricity X
Drawings X
Rent received X
Commission paid X
Building X
Loan to Bill Smith X
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Basic accounting equations
From the earlier discussion of Owner’s Equity, we saw that Assets – Liabilities = Owner’s
Equity. This equation is sometimes referred to as the Basic Accounting Equation. For
example, if business assets are valued at $10,000 & liabilities are $3,000, then Owner’s
Equity must be valued at $7,000. This equation always holds true.
The role of accounting is to record the transactions of the business. Each transaction will
affect the Accounting Equation. After each transaction is recorded, the Accounting Equation
will still hold true.
The Rules of Debits & Credits
There are some important rules that guide the recording of transactions under the widely
used “double entry” accounting system:
• All accounts are designated as being Debit or Credit by nature
• All transactions will involve 2 or more accounts
• For every transaction, the total value of Debits will ALWAYS equal the value of
Credits. DEBITS = CREDITS
For the accounting system to be effective, these assumptions/conventions or rules must be
accepted. The way the account changes (whether it increases or decreases in value) when it
is credited or debited will depend on its nature. This can be confusing at first because,
depending on their nature, accounts do not behave in the same way.
Each of these account groups is given a default nature of either debit or credit; the following
table identifies the nature of each of these groups.
Assets Debit Revenue Credit
Liabilities Credit Expenses Debit
Owner’s Equity Credit
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2.2 The Extended Accounting Equation
Notice that Assets and Expenses are DEBIT by nature and Liabilities, Revenue and Owner’s
Equity are CREDIT. Conforming with the DEBITS = CREDITS principle, we can rearrange
the “elements” of the accounting equation into:
Assets + Expenses = Liabilities + Owner’s Equity + Revenues
This is formally known as the Extended Accounting Equation and you will see it has account
groups with a DEBIT nature on the left and groups with a CREDIT nature on the right.
As mentioned previously, the role of accounting is to record the transactions of the business.
Each transaction will affect the Accounting Equation. After each transaction is recorded, the
Accounting Equation will still hold true.
When recording transactions, we want to make some accounts increase in value, others we
want to decrease in value. Accounting is dealt with in terms of debits and credits, rather than
in terms of pluses and minuses. We can change the value of an account by knowing the
nature of the account and then applying a debit or credit entry (the recording of a
transaction).
The rule to remember:
• To INCREASE an account, apply an entry that is the same as its nature
• To DECREASE an account, apply an entry that is the opposite as its nature
For example, to increase an Asset account (debit by nature) we need to create a debit entry.
To decrease a Liability account (credit by nature) we need to create a debit entry.
Two tables explaining the behaviour of each account group have been included below. The
tables contain the same information organised in different ways. To avoid confusion, you
should use whichever makes the most sense to you.
Account group
Nature of the account (normal balance)
Increase in value
(same direction)
Decrease in value
(opposite direction)
Assets Debit Debit Credit
Liabilities Credit Credit Debit
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Owners’ Equity Note1
Credit Credit Debit
Revenue Credit Credit Debit
Expenses Debit Debit Credit
Debit Credit
Increase in expense accounts Decrease in expense accounts
Increase in asset accounts Decrease in asset accounts
Decrease in equity accounts Note1
Increase in equity accounts Note1
Decrease in revenue accounts Increase in revenue accounts
Decrease in liability accounts Increase in liability accounts
A couple of simple examples:
• Assume the business has $10,000 in the bank account and an additional $1,000 is
deposited
o The bank account is an asset and its nature is DEBIT. Therefore, in our
accounts it shows as $10,000 DEBIT
o We need to increase this account to $11,000 DEBIT
o Therefore, we need to make an entry of $1,000 DEBIT
o In summary, $10,000 DEBIT + $1,000 DEBIT = $11,000 DEBIT
• Say we have a loan of $5,000, and a payment of $300 is made to reduce the loan
balance
o The loan is a liability and therefore is CREDIT by nature. It will be recorded as
$5,000 CREDIT in our accounts
o We need to decrease this amount to $4,700 CREDIT
o Therefore, we need to create a $300 DEBIT entry
o In summary, $5,000 CREDIT + $300 DEBIT = $4,700 CREDIT
Recording negative balances
Remember, in accounting we don’t have positive and negative numbers, we only have credits
and debits. An account balance can switch between debit and credit depending on its nature
and the amount of debits and credits applied to it. Here are some examples:
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• $500 debit + $300 debit = $800 debit (increasing a debit balance)
• $500 credit + $400 credit = $900 credit (increasing a credit balance)
• $500 debit + $300 credit = $200 debit (decreasing a debit balance)
• $500 credit + $500 debit = zero (decreasing a credit balance)
• $500 credit + $600 debit = $100 debit (decreases a credit balance by more than what
was in the account)
Notice in the last example, we don’t record a negative number such as -$100 credit. Instead,
we record the net value of the account. There were more debits than credits and so the
balance of the account is now $100 debit.
Note 1: A few more words about Owner’s Equity
Owner’s Equity is deemed to be CREDIT by nature. Apart from retained profits, the two main
accounts in Owner’s Equity are the Capital account and the Drawings account. When the
owner’s puts cash or other assets into the business we will always CREDIT the Capital
account to record the increase in value of the business. But consider the opposite
circumstance where the owner takes cash or other assets OUT of the business. The value of
Owner’s Equity will go down, so we need to raise a DEBIT. When the owner takes assets out
of the business, we will always DEBIT the Drawings account.
So remember: we will always CREDIT the Capital account and we will always DEBIT the
Drawings account.
2.3 A note about debtors and creditors
While we are talking about Credits and Debits, particular distinction needs to be made with
the term ‘creditor’ and ‘debtor’. These words are similar but have very different meanings in
accounting.
Creditors (Accounts Payable)
Creditors are people or businesses that our business owes money to. Typically, creditors are
suppliers that we bought goods from, but have not yet made payment. In our accounting
records we will use the account name Creditors or Accounts for these amounts.
Debtors (Accounts Receivable)
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Debtors are people or businesses that owe money to our business. Typically, these are the
customers who purchased from our business, but we have not received the payment yet. In
our accounting records we will use the account name Debtors or Accounts Receivable for
these amounts.
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3. Transaction Analysis
All transactions must be analysed before they can be entered into the accounting books. A
transaction analysis table, as shown below, is one way to identify the required the
information, particularly if you are less familiar with accounting.
Account Account
Category
Nature Increase /
Decrease Debit Credit
The below example will help put this into action in a simplified form.
On January 1, we sell a stock item for $100 plus $10 GST to a customer, and we offer credit
terms. We would work through the following steps using the following questions to assist
with the creation of the required journal entries:
Step 1: Decide what two (or more) accounts are affected by the transaction.
These are the accounts that you would choose from the Chart of Accounts
which suit the type of transaction that has taken place.
Answer: Sales, GST Collected, & Accounts Receivable
The sale of the product obviously affects the Sales account, as well as GST
Collected because the sale included $10 towards GST. The Accounts
Receivable account is also affected because the item was purchased by the
customer on credit terms, so it means the money is yet to be received.
Step 2: Identify the type of account it is – asset, liability etc.
Based on your choice of account, this will determine which account type is
relevant. Choose between the main account types, such as assets, liabilities,
owner’s equity, revenue, expenses.
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Answer: Accounts Receivable is Asset, Sales is Revenue, GST Collected is
Liability.
Step 3: Decide if the account is increasing or decreasing.
Consider whether money or value is flowing into the account (so increasing)
or out of the account (so decreasing). Is the transaction making the contents
or value go up or not?
Answer: Sales increases, GST Collected increases, Accounts Receivable
increases
All accounts in this case are increasing in value.
Step 4: Identify the underlying nature of each account.
Answer: Sales is credit by nature, GST Collected is credit by nature, and
Accounts Receivable is debit by nature.
Step 4: Determine whether you need to create a debit or credit entry.
As you know, transactions that are debit by nature and need to increase are
applied as debits, and transactions that are credit by nature and need to
increase are applied as credit.
Answer: Accounts Receivable is entered as a Debit, Sales is entered as
Credit, and GST Collected is entered as Credit.
Step 5: Record the amounts in the appropriate column of the table.
Answer: See the completed table below demonstrating the entries.
Account Name Account
Category
Nature Increase /
Decrease Debit Credit
Ac Receivable Asset Debit Inc $110
Sales Revenue Credit Inc $100
GST Collected Liability Credit Inc $10
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The general journal entry for this transaction would then look like this:
Account Name /
Particulars
Folio Ac
#
Debit Credit
Ac Receivable 1-1200 $110.00
Sales 4-1100 $100.00
GST Collected 2-1310 $10.00
When analysing transactions for accounting remember the following basics:
• In any transaction there will always be 2 or more accounts involved. It is important to be
able to identify the accounts
• If the transaction description mentions the word “borrowed”, then it suggests that one of
the accounts will be a Loan account
• Words like “paid”, “received”, “cheque”, “cash” all indicate a cash transaction and that the
bank account will be involved
• If the owner is mentioned, then one of the Owner’s Equity accounts (capital or drawings)
will be involved. When the owner puts something into the business, we use the Capital
Account. If the owner takes something out of the business, we use the Drawings Account
• “On credit” means that Ac Receivable or Ac Payable will be involved
• Terms like “stock”, “goods”, “merchandise” refer to items of Inventory in the accounts.
When purchasing inventory, we will use the Purchases Account. When selling inventory,
we use the Sales Revenue account on the day of the transaction and record the cost of
sales and decrease in inventory in a later entry
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Practice exercise 2: Identify the accounts involved
Name the two accounts involved in each of the following transactions:
Transaction Account 1 Account 2
Capital contribution by owner (cash)
The owner contributes vehicle as his capital contribution
The owner takes equipment for his own use
We buy furniture for cash
We pay for equipment bought previously on credit
We buy equipment on credit from X business
We buy premises from Y business and agree to pay next month
Sold old equipment for cash
Sold old equipment on credit to Mr P.
Borrowed cash from B Lending Co
Paid back part of the loan from B Lending Co
We paid money owed to account payable: X Business
Received money from Accounts Receivable: Mr P
Practice exercise 2 Solution
Transaction Account 1 Account 2
Capital contribution by owner (cash) Capital Bank
The owner contributes vehicle as his capital contribution Capital Vehicle
The owner takes equipment for his own use Drawings Equipment
We buy furniture for cash Furniture Bank
We pay for equipment bought previously on credit Creditors Bank
We buy equipment on credit from X business Creditors Equipment
We buy premises from Y business and agree to pay next month Creditors Premises
Sold old equipment for cash Equipment Bank
Sold old equipment on credit to Mr P. Debtors Equipment
Borrowed cash from B Lending Co Loan Bank
Paid back part of the loan from B Lending Co Loan Bank
We paid money owed to account payable: X Business Creditors Bank
Received money from Accounts Receivable: Mr P Debtors Bank
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Practice exercise 3: Transaction analysis
Complete the transaction analysis table for each of these business transactions.
1. The owner invested $20000 in the business as Capital
2. Purchased a vehicle on credit for $6000.
3. Purchased Equipment for $1500 cash.
4. Paid rent $800
5. Purchased inventories for $600. Paid by cash.
6. Received $750 for services rendered.
7. Paid telephone bill, $150
8. Purchased equipment on credit from Y Vent for $2900
9. The owner withdrew $600 for personal use.
10. Paid $150 for an advertisement in the local paper
11. Charged a credit customer $350 for services rendered.
12. Purchased stock on credit for $400.
13. Borrowed $5000 from NAB Bank.
No Accounts involved
Account Type
Inc/ Dec
Debit Credit
1
2
3
4
5
6
7
8
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10
11
12
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Practice exercise 3 Solution
No Accounts involved Account Type Inc/Dec Debit Credit
1 Bank Asset Inc $20,000.00
Capital Owner's Equity Inc $20,000.00
2 Vehicle Asset Inc $6,000.00
Accounts Payable (Creditors) Liability Inc $6,000.00
3 Equipment Asset Inc $1,500.00
Bank Asset Dec $1,500.00
4 Rent Expense Expense Inc $800.00
Bank Asset Dec $800.00
5 Purchases Expense Inc $600.00
Bank Asset Dec $600.00
6 Bank Asset Inc $750.00
Service Revenue Revenue Inc $750.00
7 Telephone Expense Expense Inc $150.00
Bank Asset Dec $150.00
8 Equipment Asset Inc $2,900.00
Accounts Payable (Creditors) Liability Inc $2,900.00
9 Drawings Owner's Equity Inc $600.00
Bank Asset Dec $600.00
10 Advertising expense Expense Inc $150.00
Bank Asset Dec $150.00
11 Accounts Receivable (Debtors) Asset Inc $350.00
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Services Revenue Revenue Inc $350.00
12 Purchases Expense Inc $400.00
Accounts Payable (Creditors) Liability Inc $400.00
13 Bank Asset Inc $5,000.00
Bank Loan Liability Inc $5,000.00
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4. Goods & Services Tax (GST)
Goods and services tax (GST) is a broad-based tax of 10% on most goods, services and
other items sold or consumed in Australia. For consumers, the tax is usually included in price
of item, however some items are tax free.
Business must register with the ATO for GST if turnover is more than $75,000.
Modified from: Australian Tax Office, “GST”, https://www.ato.gov.au/Business/GST/
Accessed on 1/10/2020.
Some common terminology:
• Exempt: the item is exempt of GST
• Inc GST: the price quoted INCLUDES a GST amount
• Gross Amount: the price quoted includes GST
• All up amount: the price quoted includes GST
• Exc. GST: the price quoted DOES NOT include the GST amount
• Net of GST: the price quoted is not showing the GST amount
GST Exempt items include:
• Most fresh or unprocessed food
• Wages
• Domestic Rent
• Interest Expense
• Interest Revenue
• Bank Charges
• Council Rates
• Loans given or received
• Capital Contributions by the owner
• Drawings of cash by owner
• Cash paid to A/c Payable (Creditors)
• Cash received from A/c Receivable (Debtors)
For more information, visit the ATO website, https://www.ato.gov.au/business/gst/when-to-
charge-gst-(and-when-not-to)/gst-free-sales/
How to perform GST Calculations
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If Ex GST price is quoted:
• If the price EXCLUDES GST: E.g.: $80 (ex GST), $80 (net of GST), $80 plus GST
• Multiply the price by 10%. Add the percentage of GST to the price. This is now the
amount inclusive of GST
• $80.00 x 10% = $8.00
• $80 + $8 = $88 (inc. GST)
If Inc GST price is quoted:
• If the price INCLUDES GST:
• E.g.: $88 (inc. GST), $88 (all up), $88 (gross)
• Divide the price by 11. Deduct the amount from the price. This is the amount
excluding GST
• $88.00 ÷ 11 = $8.00
• $88 - $8 = $80 (exc. GST)
Accounting for GST:
• GST accounts are usually listed as a Liability in a business books = CREDIT in
nature
• When we sell non-exempt products and services (including assets), we add GST to
the selling price and in our accounts, we write a CREDIT to the account called GST
Collected for the GST
• When we buy non-exempt products including assets, services, or pay an expense,
we pay GST in the price and we will record this as a DEBIT to the account called
GST Paid in our books
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Practice exercise 4: Transaction Analysis inc. GST
Complete the transaction analysis table for the following transactions. GST needs to be
added to the amounts where applicable:
1 The Owner began the business with $60,000 in cash which was deposited into the bank. Machinery ($15,000) and a Vehicle ($12,000) was put into the business by the owner.
2 Bought inventory on credit $35,000.
3 Borrowed $15,000 from ABC bank.
4 Received a commission of $50 for referring a customer to another local business.
5 Paid $3,500 in council rates for the year.
6 Sold inventory on credit for $6,000.
7 Purchased furniture for the business $15,000 on credit.
8 Paid electricity $264.
9 Customers bought goods for $3,000 for cash.
10 The owner withdrew cash $150.
# Accounts
Inc Account
Type Debit Credit
Decr
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Practice exercise 4 Solution
# Accounts Inc Dec
Account Type
Debit Credit
1 Bank Inc Asset $60,000.00
Machinery Inc Asset $15,000.00
Vehicle Inc Asset $12,000.00
Capital Inc Owner Equity $87,000.00
2 Purchases Inc Expense $35,000.00
GST Paid Inc Liability $3,500.00
Accounts Payable Inc Liability $38,500.00
3 Bank Inc Asset $15,000.00
Bank Loan Inc Liability $15,000.00
4 Bank Inc Asset $55.00
Commission Revenue Inc Revenue $50.00
GST Collected Inc Liability $5.00
5 Rates Expense Inc Expense $3,500.00
Bank Dec Asset $3,500.00
6 Accounts Receivable Inc Asset $6,600.00
Sales Revenue Inc Revenue $6,000.00
GST Collected Inc Liability $600.00
7 Furniture Inc Asset $15,000.00
GST Paid Inc Liability $1,500.00
Accounts Payable Inc Liability $16,500.00
8 Electricity Expense Inc Expense $264.00
GST Paid Inc Liability $26.40
Bank Dec Asset $290.40
9 Bank Inc Asset $3,300.00
Sales Revenue Inc Revenue $3,000.00
GST Collected Inc Liability $300.00
10 Drawings Inc Owner Equity $150.00
Bank Dec Asset $150.00
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5. Accounting processes
5.1 The Accounting Cycle
Business information is systematically coded, classified and checked through an information
system. At the heart of the accounting system lies the accounting process, which is detailed
below.
Source
document > Journal >
General
Ledger >
Trial
Balance >
Financial
Statements
An information system, whether in a manual or computerised platform, accepts input called
transactions captured from source documents, which are then converted through processes
into output information for end users.
Source Documents
A source document is a document or form that provides details of a transaction and
evidence that the transaction has occurred. Examples include Invoices, Receipts, Cheques,
General Journal Vouchers, Cash Sales Slips, or any other document that validates or
supports the creation of a transaction in the business books.
A source document is drawn up by a business and given to another business or person.
Accounting entries are made from source documents and they provide evidence that the
transaction has occurred.
Source documents may vary in appearance, however typically they will include:
• Date
• Document number
• Nature of the transaction (e.g. sale on credit, purchase for cash, etc)
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• Parties to the transaction (i.e. names – or “cash”)
• The amount
• Terms and conditions of the transaction
• Any other relevant details (account numbers, etc)
Source documents can be manually written such as a handwritten sales docket or memo, or
electronically generated such as EFTPOS receipts, cash register receipts, or reference
details for payments made on the internet.
Details of the source document must be recorded within the transaction journal entry.
5.2 Journals
All business financial transactions must firstly be recorded into a journal. A business can
structure its system of journals according to its needs however many simplify the process by
using a series of specialist journals to group similar transactions in one place.
Typical specialist journals include:
• The cash receipts journal (CRJ)
o Records all transactions involving cash received into the business from any
source. E.g. cash from sales, receipt of payments from previous sales to
debtors, and could also include proceeds of loans and contributions by
owners in cash
• The cash payments journal (CPJ)
o Records all cash paid by the business for any purpose. This can include
cash purchases of inventory, cash payments to suppliers for previous
purchases on credit, cash payments of expenses, purchase of assets, or
repayments of loans
• The sales journal (SJ)
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o Records sales of inventory or merchandise to customers on credit only
• The purchases journal (PJ)
o Records purchases of inventory from suppliers on credit only
• General Journal:
o In addition to the specialist journals, the general journal is used for recording
any transactions that cannot be accommodated in any of the specialist
journals
Cash Receipts Journal (CRJ)
A business that uses a CRJ will record all receipts of cash into this journal. Each row is
a separate transaction. The Bank Column amounts are DEBIT, the other amounts are
CREDIT.
For example, on June 2 we CREDIT Sales $1,500, CREDIT GST $150 and DEBIT
Bank $1,650. Notice that debits = credits in each transaction (row).
Cash Receipts Journal – June 2019
Date Particulars Folio Receipt
No Debtor Sales
GST
Collected Sundries Bank
(For
Sundries) 1-1200
4-
4100 2-1310
(Use
Folio)
1-
1100
2-Jun Sales CRS 1,500 150 1,650
10-
Jun John Earl 120 5,445 5,445
17-
Jun Loan 2-2700 126 10,000 10,000
Totals 5,445 1,500 150 10,000 17,095
Explanations:
• Date: Record the date of each transaction
• Particulars: This is the name of the Ledger account. In the case of Debtors
payments, this will be the name of the Debtor
• Folio: The General Ledger account number
• Receipt no: The number or description of the source document (CRS = Cash
Register Summary)
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• Debtor: All payments received from credit customers are recorded in this
column. This is a CREDIT to the Debtor Ac
• Sales: All cash sales amounts are recorded in this column. This is a CREDIT to
the Sales Ac
• GST Collected: The GST component of any receipts is recorded in this column.
This is a CREDIT to the GST Collected Ac
• Sundries: Use this column for any amounts that cannot be allocated to any
other column. This is a CREDIT to the account involved
• Bank: This is the total amount of cash received. The amounts in the other
columns on this row will equal the Bank amount. This is a DEBIT to the Bank
Ac
• Totals: At the end of month, all the columns are totalled. The Bank column will
always equal the total of all the other columns
Cash Payments Journal (CPJ)
A business that uses a CPJ will record all payments of cash into this journal. Each row
is a separate transaction. The Bank Column amounts are CREDIT, the other amounts
are DEBIT.
For example, on June 17 we DEBIT GST $100, DEBIT Lease (expense) $1000 and
CREDIT Bank $1,100. Notice that debits = credits in each transaction (row).
Cash Payments Journal – June 2019
Date Particular
s Folio
Chq
no.
Credito
r
Purchase
s
GST
Paid
Sundrie
s
Ban
k
(Sundries
) 2-1200 5-5200
2-
133
0
(Use
Folio)
1-
1100
12-
Jun
Stock
Purchases 57 2,500 250
2,75
0
16-
Jun ABC Co 58 1,199
1,19
9
17-
Jun Lease 6-6500 59 100 1,000
1,10
0
Total
s 1,199 2,500 350 1,000
5,04
9
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Explanations:
• Date: Record the date of each transaction
• Particulars: This is the name of the Ledger account. In the case of Creditor
payments, this will be the name of the Creditor
• Folio: The General Ledger account number
• Chq no: The number of the cheque or other source document
• Creditor: All payments to credit suppliers are recorded in this column. This is a
DEBIT to the Creditor’s Ac
• Purchases: All cash payments for inventory are recorded in this column. This
is a DEBIT to the Purchases Ac
• GST Paid: The GST component of any payment is recorded in this column. This
is a DEBIT to the GST Paid Ac
• Sundries: Use this column for any amounts that cannot be allocated to any
other column. This is a DEBIT to the account involved
• Bank: This is the total amount of cash paid. The amounts in the other columns
on this row will equal the Bank amount. This is a CREDIT to the Bank Ac
• Totals: At the end of month, all the columns are totalled. The Bank column will
always equal the total of all the other columns
The sales journal (SJ)
Records sales of inventory or merchandise to customers on credit only.
For example, on 8 June we made a sale to Red Traders on Credit. We CREDIT Sales
$8,070, CREDIT GST Collected $807 and record DEBIT to the Debtor’s Ac $8,877.
Sales Journal – June 2019
Date Particulars Invoice
Number Sales
GST
Collected Debtor Total
4-4100 2-1310 1-1200
8/6 Red Traders 5711 8,070 807 8,877
12/6 Blue Lake Pty Ltd 5712 5,400 540 5,940
22/6 Green & Co 5713 2,500 250 2,750
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Totals: 15,970 1,597 17,567
Explanations:
• Date: Record the date of each transaction
• Particulars: This is the name Debtor
• Invoice no: The number of the source document
• Sales: The sales (ex GST) amount is recorded in this column. This is a
CREDIT to the Sales Ac
• GST Collected: The GST component of the sale is recorded in this
column. This is a CREDIT to the GST Collected Ac
• Debtor Total: This is the amount inc. GST to be collected from the
customer in this column. This is a DEBIT to the Debtor Ac
• Totals: At the end of the month, all the columns are totalled. The
Debtor column will always equal the total of all the other columns
The Purchases Journal (PJ)
Records purchases of inventory or merchandise from suppliers on credit only.
For example, on 12 June we purchased stock from Catering Services on Credit. We
DEBIT Purchases $1,500, DEBIT GST Collected $150 and record to the Creditor Ac
$1,650.
Purchases Journal – June 2019
Date Particulars Invoice
Number
Purchase
s
GST Paid Creditor Total
5-5200 2-1330 2-1200
12/6 Catering Services 887 1,500 150 1,650
27/6 Office Supplies P/L 7896 3,300 330 3,630
Totals: 4,800 480 5,280
Explanations:
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• Date: Record the date of each transaction
• Particulars: This is the name Creditor
• Invoice no: The number of the source document
• Purchases: The inventory purchases (ex GST) amount is recorded in this
column. This is a DEBIT to the Purchases Ac
• GST Collected: The GST component of the sale is recorded in this column.
This is a DEBIT to the GST Paid Ac
• Creditor Total: This is the amount inc. GST to be collected from the customer
in this column. This is a CREDIT to the Creditor Ac
• Totals: At the end of month, all the columns are totalled. The Creditor column
will always equal the total of all the other columns
The General Journal (GJ)
Businesses can structure a system of journals in whatever way suits its needs. A smaller
business may choose to enter all transactions into a general journal. When specialist journals
are used however, the general journal is reserved for recording any transactions that cannot
be accommodated in any of the specialist journals.
The general journal looks very similar to the transaction analysis tables shown previously and
the same transaction analysis steps need to be worked through to determine which accounts
to use and decide which to debit and which will be credit.
Shown below is an example of a general journal entry:
The Coffee Shop
General Journal
Date Particulars
4Folio
ref Debit Credit
1/6/201 Inventory2 1-1200 5,000
Delivery Vehicle 1-1320 5,000
3Capital 3-1000 10,000
5(Owner contributes assets to start
business)
6
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There are some formatting rules to be followed when preparing GJ entries. Consistent
formatting makes the journals easier to read and reduces the likelihood of error.
Each GJ entry should follow these formatting rules:
1. Transaction date
2. Debit entries are written before Credit entries
3. Credit account names are indented slightly (about 1cm from the margin)
4. Record the ledger account number in the Folio/ref column
5. A narration or brief description is written (usually placed in brackets)
6. Rule off the transaction with a heavy or double line in the Particulars column
Remember, the GJ is used whenever a transaction cannot be accommodated in one of the
specialist journals. Typical transactions that are recorded in the GJ include:
1. When the owner contributes non-cash assets to the business
2. When the business buys a non-inventory asset on credit
3. When the business sells a non-inventory asset on credit
4. When the business is charged interest on overdue amounts payable (Creditors)
5. When the business charges interest on overdue amounts receivable (Debtors)
6. When the business makes a provision for Bad Debts
7. When the business writes off a Bad Debt
8. When the owner withdraws non-cash assets from the business or incurs business
expenses for personal use
9. Recording end of period account adjustments
In the GJ below are examples of each of the outlined transactions.
Date
2020 Particulars
Folio Debit Credit
1. 1 Jun Equipment 1-1500 4,000.00
Motor Vehicle 2-1330 400.00
Capital 1-1100 4,400.00
(Owner’s contribution to business)
2. 10 Jun Computer 1-1200 4,800.00
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GST paid 2-1330 480.00
Creditors – (ABC
Computers)
2-1200 5,280.00
(Purchase Computer on credit)
3. 12 Jun Debtors 1-1200 17,567.00
GST collected 1-1310 1,597.00
Furniture 4-4100 15,970.00
(Sell obsolete furniture on credit)
4. 14 Jun Interest Expense 6-3220 45.00
Creditors – (XYZ Limited) 2-1200 45.00
(Interest charged on overdue
supplier bill)
5. 15 Jun Debtors 1-1200 55.00
Interest Revenue 4-3220 55.00
(Charged customer on overdue bill)
6. 20 Jun Bad Debts Expense 6-6600 1,000.00
Provision for Doubtful Debts 1-1250 1,000.00
(Record a provision for Bad Debts)
7. 25 Jun Bad debts 6-6300 1,500.00
GST Collected 2-1310 150.00
Debtors 1-1200 1,650.00
(Andrew Stimpson bad debt written
off)
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8. 26 Jun Drawings 3-3200 297.00
Telephone Expense 6-4500 120.00
Paint supplies (Inventory) 1-1300 150.00
GST Collected 2-1330 27.00
(Owner took paint and used
telephone for personal use)
9. 28 Jun Salaries & Wages 6-6900 4,250.00
Accrued expenses 2-2500 4,250.00
(Feb wages not yet due for
payment)
Practice exercise 5: Writing transactions into journals
Ms White starts a business on 1 June 20xx. These are the transactions for her business
White's Fruit Shop for June 20xx.
Record these transactions into the appropriate journal and total the journals off at the end of
the month. Note: * indicates which transactions have no GST
Day Source Doc
Transaction Amount
(Incl GST)
1 R001 Ms White contributes cash to start the business. 4200*
2 C001 Inventory is purchased for cash. 473
4 TXC34 We buy inventory on credit from Richlands Farms. 220
5 CRS Cash sales. 198
7 R002 We take out a loan from Global Bank. 500*
9 C002 Wages paid. 620*
10 RFE47 We buy 3 Desks (Furniture) on credit from Sparkle Shops.
825
12 TXCR01 We sell inventories to Brisbane School on credit. 352
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14 R003 Rent received from our tenant (business rent). 55
C003 Pay electricity bill. 143
15 C004 The owner, Ms White took cash for her own use. 300*
17 456W We bought inventory on credit from Donne Farm. 143
19 TXCR02 Sold inventory on credit to Pink Ribbon Stores. 231
22 INT01 We charge Spring Hill School interest on their overdue account.
12*
23 R004 We sell a desk (Furniture) that is not needed to Jim’s Handyman for cash.
165
26 R005 Brisbane School pays the following off their account.
150*
29 TXCR03 Sell inventory on credit to Brisbane School. 99
Cash Receipts Journal
Date 20xx
Particulars Folio Doc Sales Debtors Other GST
Collected Bank
4-1000 1-5000 2-3100 1-1100
Cash Payments Journal
Date 20xx
Particulars Folio Doc Purchases Creditors Other GST Paid
Bank
5-5100 2-5000 2-3200 1-1100
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Purchases Journal
Date 20xx
Particulars Doc Purchases GST Paid Creditors
5-5100 2-3200 2-5000
Sales Journal
Date 20xx
Particulars Doc Sales GST
Collected Debtors
4-1000 2-3100 1-5000
General Journal
Date 20xx
Particulars Folio Debit Credit
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Practice exercise 5 solution
Purchases Journal
Date 20xx
Particulars Doc Purchases GST Paid Creditors
5-5100 2-3200 2-5000
4-Jun Richlands Farms TXC34 200 20 220
17-Jun Donne Farm 456W 130 13 143
330 33 363
Sales Journal
Date 20xx
Particulars Doc Sales GST
Collected Debtors
4-1000 2-3100 1-5000
12-Jun Brisbane School TXCR01 320 32 352
19-Jun Pink Ribbons Stores
TXCR02 210 21 231
29-Jun Brisbane School TXCR03 90 9 99
620 62 682
Cash Receipts Journal
Date 20xx
Particulars Folio Doc Sales Debtors Other GST
Collected Bank
4-1000 1-5000 2-3100 1-1100
1-Jun Capital 3-1000 R001 4200 4200
5-Jun Sales CRS 180 18 198
7-Jun Loan: Global Bank
2-4000 R002 500 500
14-Jun Rent Revenue
4-1200 R003 50 5 55
23-Jun Furniture 1-3100 R004 150 15 165
26-Jun Brisbane School
R005 150 150
180 150 4900 38 5268
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Cash Payments Journal
Date 20xx
Particulars Folio Doc Purchases Creditors Other GST Paid
Bank
5-5100 2-5000 2-3200 1-1100
2-Jun Inventory 1-2000 C001 430 43 473
9-Jun Wages 6-1300 C002 620 620
14-Jun Electricity 6-1400 C003 130 13 143
17-Jun Drawings 3-2000 C004 300 300
430 0 1050 56 1536
General Journal
Date 20xx Particulars Folio Debit Credit
10-Jun Furniture 1-3100 750
GST Paid 2-3200 75
A/c Payable control - Sparkle Shops 2-5000 825
(Bought desks on credit – RFE47)
22-Jun A/c Receivable control - Brisbane School 1-5000 12
Interest revenue 4-1100 12
(Charged interest on late account – INT01)
5.3 Ledgers
A General Ledger is a separate list of all the accounts of a business. It is a place where the
balances of each account are calculated. In a manual accounting system, the general ledger
is a "book" with a separate section, page, or ledger sheet for each account in the business.
Posting from the journal into the ledger is a very straight forward process. Follow these steps:
• Read the transaction in the journal
• Locate the required account in the General Ledger
• Record the exact same amount as shown in the journal into the debit column or credit
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column in the ledger as indicated in the journal
Posting Journals to Ledgers
Posting Specialist journals
A major advantage of using specialist journals is that we can post monthly totals into the ledger
rather than individual transactions. In the following CRJ we have highlighted the relevant data
in red. Remember that in the CRJ, the Bank account figure ($17,095) is a debit and all the
other figures are credits.
To post this CRJ we need to record the following entries into the general ledger:
• Debtor Account – 5,445 Credit (dated Jun 30)
• Sales Account – 1,500 Credit (dated Jun 30)
• GST Collected - $150 Credit (dated Jun 30)
• Loan Account - $10,000 Credit (dated Jun 17) *
• Bank Account – 17,095 Debit (dated Jun 30)
*Note that all amounts in the Sundry column need to be posted separately to their respective
accounts. We also use the actual date of the transaction, not the end of month date.
Posting General Journal
Each individual line of the GJ needs to be posted separately into the GL. So, in the following
GJ, we must post a $4,000 debit to the Equipment account: $400 debit to the Motor Vehicle
account and $,400 credit to the Capital account.
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Date
2020 Particulars
Folio Debit Credit
1. 1 Jun Equipment 1-
1500
4,000.00
Motor Vehicle 2-
1330
400.00
Capital 1-1100 4,400.00
(Owner’s contribution to business)
Posting to ledgers can seem a bit confusing at first. However, after a little practice, you will
see how straight forward it can be.
Ledger Formats
General ledgers can be formatted in accordance with the needs of the business. In practice
there are two common ways to present a general ledger:
• T-Account format
• Running balance format
T Account Format
The T-Account is a visual way of presenting individual accounts in the General Ledger. They
get their name from the obvious “T” shape. See below for a simplified example.
Note the following formatting rules:
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• The name of the account always appears at the top of the T
• Debits are always shown on the left side of the T
• Credits are always shown on the right side of the T
Posting Journal entries to the T account.
The example below will demonstrate posting into the Bank Account from specialist journals
(CRJ & CPJ).
Consider the CRJ shown previously:
Cash Receipts Journal – June 2019
Date Particulars Folio Receipt
No Debtor Sales
GST
Collected Sundries Bank
(For
Sundries) 1-1200 4-4100 2-1310
(Use
Folio)
1-
1100
2-Jun Sales CRS 1,500 150 1,650
10-Jun John Earl 120 5,445 5,445
17-Jun Loan 2-2700 126 10,000 10,000
Totals 5,445 1,500 150 10,000 17,095
Cash Payments Journal – June 2019
Date Particulars Folio Chq
no. Creditor Purchases
GST
Paid Sundries Bank
(Sundries) 2-1200 5-5200 2-1330 (Use
Folio) 1-1100
12-
Jun
Stock
Purchases 57 2,500 250 2,750
16-
Jun ABC Co 58 1,199 1,199
Totals 1,199 2,500 250 3,949
Below is the Bank Account T account with the 3 entries posted.
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Note the following:
• The name and account number of the account is shown at the top
• The T is written in a heavy line with debits on the left and credits on the right
• On 1/6/xx we carried forward a balance from the previous month
• The CRJ total is recorded in the debit side
• The CPJ total is recorded on the credit side
• In the date column is the date of the transaction in the journal
• In the Particulars column we record the name of the account that was the “other
side” of the transaction
• In the Folio column, we will show the source journal where the transaction was
recorded
• On 30/6/xx we calculated the closing (ending) balance of the account for the month
The posting process continues for all the other accounts written in the journals.
Running Balance Format
The running balance general ledger format looks slightly different from the T style format as
shown below. The major difference here is the debit and credit column are shown on the right
hand side and an extra column is added to keep a “running balance” of the account after every
transaction, rather than at the end of the month as shown in the T account example previously.
1-1100 Bank Asset
Date Particulars Ref Debit Credit Balance Dr
Cr
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Let us post the previous CPJ & CRJ into the General Ledger using the running balance format:
Note the following:
• Date: the date of the transaction in the journal (in this case it is end of month totals).
• Particulars column: the name of the account that was the “other side” of the
transaction.
• Ref column: the source journal where the transaction was recorded.
• Debit/Credit column: record the amount of transaction into the same column it
appeared in the journal.
• Balance column: calculate the balance of the account after each entry.
The posting process continues for all the other accounts in the journals.
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Practice Exercise 6: Posting Journals to the General Ledger Post the journal entries from the journal solutions shown for exercise 5 into the General
Ledger below.
General Ledger
Bank 1-1100
Date Particulars Post Debit Credit Balance Dr/CR
Furniture 1-3100
Date Particulars Post Debit Credit Balance Dr/CR
Debtors 1-5000
Date Particulars Post Debit Credit Balance Dr/CR
Creditors 2-5000
Date Particulars Post Debit Credit Balance Dr/CR
GST Collected 2-3100
Date Particulars Post Debit Credit Balance Dr/CR
GST Paid 2-3200
Date Particulars Post Debit Credit Balance Dr/CR
Loan: Global Bank – 2-4000
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Date Particulars Post Debit Credit Balance Dr/CR
Capital 3-1000
Date Particulars Post Debit Credit Balance Dr/CR
Drawings 3-2000
Date Particulars Post Debit Credit Balance Dr/CR
Sales 4-1000
Date Particulars Post Debit Credit Balance Dr/CR
Interest Revenue 4-1100
Date Particulars Post Debit Credit Balance Dr/CR
Rent Revenue 4-1200
Date Particulars Post Debit Credit Balance Dr/CR
Purchases 5-5100
Date Particulars Post Debit Credit Balance Dr/CR
Wages 6-1300
Date Particulars Post Debit Credit Balance Dr/CR
Electricity 6-1400
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Date Particulars Post Debit Credit Balance Dr/CR
Practice Exercise 6: Solution
General Ledger
Bank 1-1100
Date Particulars Post Debit Credit Balance Dr/CR
30-Jun Receipts CRJ 5268 5268 DR
Payments CPJ 1536 3732 DR
Furniture 1-3100
Date Particulars Post Debit Credit Balance Dr/CR
10-Jun A/c Payable Control
GJ 750 750 DR
23-Jun Bank CRJ 150 600 DR
Debtors 1-5000
Date Particulars Post Debit Credit Balance Dr/CR
22-Jun Interest Revenue GJ 12 12 DR
30-Jun Sales & GST SJ 682 694 DR
Bank 150 544 DR
Creditors 2-5000
Date Particulars Post Debit Credit Balance Dr/CR
10-Jun Furniture & GST GJ 825 825 CR
30-Jun Purchases & GST PJ 363 1188 CR
GST Collected 2-3100
Date Particulars Post Debit Credit Balance Dr/CR
30-Jun Bank CRJ 38 38 CR
Debtors SJ 62 100 CR
GST Paid 2-3200
Date Particulars Post Debit Credit Balance Dr/CR
10-Jun Creditors GJ 75 75 DR
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30-Jun Bank CPJ 56 131 DR
Creditors PJ 33 164 DR
Loan: Global Bank – 2-4000
Date Particulars Post Debit Credit Balance Dr/CR
7-Jun Bank CRJ 500 500 CR
Capital 3-1000
Date Particulars Post Debit Credit Balance Dr/CR
1-Jun Bank CRJ 4200 4200 CR
Drawings 3-2000
Date Particulars Post Debit Credit Balance Dr/CR
17-Jun Bank CPJ 300 300 DR
Sales 4-1000
Date Particulars Post Debit Credit Balance Dr/CR
30-Jun Debtors SJ 620 620 CR
Bank CRJ 180 800 CR
Interest Revenue 4-1100
Date Particulars Post Debit Credit Balance Dr/CR
22-Jun Debtors GJ 12 12 CR
Rent Revenue 4-1200
Date Particulars Post Debit Credit Balance Dr/CR
14-Jun Bank CRJ 50 50 CR
Purchases 5-5100
Date Particulars Post Debit Credit Balance Dr/CR
30-Jun Bank CPJ 430 430 DR
Creditors PJ 330 760 DR
Wages 6-1300
Date Particulars Post Debit Credit Balance Dr/CR
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9-Jun Bank CPJ 620 620 DR
Electricity 6-1400
Date Particulars Post Debit Credit Balance Dr/CR
14-Jun Bank CPJ 130 130 DR
Subsidiary Ledgers
A Subsidiary ledger is a group of accounts whose combined balances equal an overriding
“control account” in the general ledger.
An Accounts Receivable Subsidiary (or Debtors) Ledger shows an account for each
customer who makes a credit purchase. All details for this customer are posted to this
subsidiary account (e.g. sales, receipts, interest charged, etc) so that we can track how
much a particular customer owes us.
An Accounts Payable Subsidiary (or Creditors) Ledger shows an account for each
supplier from whom we make a credit purchase. All details for this supplier are posted to
this subsidiary account (e.g. purchases, payments, interest charged, etc) so that we can
track how much we owe a particular supplier.
Transactions are posted to accounts in the general ledger as usual. However, an additional
entry is made to the subsidiary ledger whenever amounts are posted to the control accounts.
Below is an example of an Accounts Receivable Subsidiary Ledger for B. Brown.
B Brown
Accounts Receivable Subsidiary Ledger
Date Particulars Post
Ref Debit Credit Balance
Jun-01 Balance b/d 140.00 140.00 DR
3 Bank CRJ 140.00 0.00 DR
4 Sales and GST Clearing SJ 495.00 495.00 DR
10 Bank CRJ 450.00 45.00 DR
12 Sales and GST Clearing SJ 682.00 727.00 DR
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The format is identical for the Accounts Payable Subsidiary Ledger. The same posting rules
apply as for posting to the General Ledger regarding the date, particulars, source journal etc.
Accounts Receivable and Accounts Payable Schedules
An Accounts Receivable Schedule is a list of all the customers in the AC Receivable
Subsidiary Ledger. It includes the current balance of their account (what they currently owe
us). Schedules are an important way to check for errors because the Schedule total must
equal General Ledger Control Ac.
Below is a series of Accounts Receivable Subsidiary Ledgers.
XYZ Pty Ltd
Accounts Receivable Subsidiary Ledger
Date 20XX
Particulars Post Ref
Debit Credit Balance
Jun 16 Sales and GST SJ 561.00 561.00 DR
20 Sales and GST GJ 605.00 1 166.00 DR
ABC Pty Ltd
Accounts Receivable Subsidiary Ledger
Date 20XX
Particulars Post Ref
Debit Credit Balance
Jun 8 Sales and GST SJ 9 460.00 9 460.00 DR
23 Interest Revenue GJ 7.88 9 467.88 DR
BTU Pty Ltd
Accounts Receivable Subsidiary Ledger
Date 20XX
Particulars Post Ref
Debit Credit Balance
Jun 16 Sales and GST SJ 374.00 374.00 DR
28 Bank CRJ 200.00 174.00 DR
EEE Pty Ltd
Accounts Receivable Subsidiary Ledger
Date 20XX
Particulars Post Ref
Debit Credit Balance
Jun 10 Sales and GST SJ 858.00 858.00 DR
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Here is an Accounts Receivable Schedule. The total of the schedule should be reconciled
with the balance of the Accounts Receivable Control Ac in the General Ledger.
Schedule of Accounts Receivable
as at 30 Jun 20XX Customer Balance $
XYZ Pty Ltd 1 166.00
ABC Pty Ltd 9 467.88
BTU Pty Ltd 174.00
EEE Pty Ltd 858.00
Balance as per GL control Ac $11,665.88
Practice exercise 7: Posting to the Subsidiary Ledgers & Schedules
Using the journals from exercise 6, post all entries to the Debtors and Creditors Subsidiary Ledgers and prepare the Debtor and Creditor Schedules.
Check that the schedules agree with the control accounts in the General Ledger.
Debtors Subsidiary Ledgers
Brisbane School
Date Particulars Post Debit Credit Balance Dr/CR
Pink Ribbon Stores
Date Particulars Post Debit Credit Balance Dr/CR
Creditor Subsidiary Ledgers
Richlands Farms
Date Particulars Post Debit Credit Balance Dr/CR
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Donne Farm
Date Particulars Post Debit Credit Balance Dr/CR
Sparkle Shops
Date Particulars Post Debit Credit Balance Dr/CR
Debtors Schedule
As of June 30, 20xx
Creditors Schedule
As of June 30, 20xx
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Practice exercise 7 Solution
Debtors Subsidiary Ledgers
Brisbane School
Date Particulars Post Debit Credit Balance Dr/CR
12-Jun Sales & GST SJ 352 352 DR
22-Jun Interest revenue GJ 12 364 DR
26-Jun Bank CRJ 150 214 DR
29-Jun Sales & GST SJ 99 313 DR
Pink Ribbon Stores
Date Particulars Post Debit Credit Balance Dr/CR
19-Jun Sales & GST SJ 231 231 DR
Creditor Subsidiary Ledgers
Richlands Farms
Date Particulars Post Debit Credit Balance Dr/CR
4-Jun Purchases & GST PJ 220 220 CR
Donne Farm
Date Particulars Post Debit Credit Balance Dr/CR
17-Jun Purchases & GST PJ 143 143 CR
Sparkle Shops
Date Particulars Post Debit Credit Balance Dr/CR
20-Jun Furniture & GST GJ 825 825 CR
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Debtors Schedule
As of June 30, 20xx
Brisbane School 313
Pink Ribbon Stores 231
Balance as per General Ledger control Ac
544
Creditors Schedule
As of June 30, 20xx
Richlands Farms 220
Donne Farm 143
Sparkle Shops 825
Balance as per General Ledger control Ac
1188
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6. Trial balance
6.1 Preparing Trial Balance
A trial balance is an accounting worksheet that lists each account name and balance that is
recorded in the general ledger, and these are compiled in debit and credit columns. The trial
balance is to verify that all the postings to the general ledger do in fact balance whereby all
the debit entries equal all credit entries. This is a quick check that highlights if any errors
have occurred in posting entries to the ledgers.
You perform a trial balance by transferring all the general ledger account ending balances to
the trial balance in the appropriate column of credit or debit. For example, the bank account
is showing a debit balance at the end of the period and would be posted to the debit column
of the trial balance. Accounts with credit balances will appear in the credit column of the trial
balance. At the end of this process, the debit column should equal the credit column. Again,
this is one of the fundamental rules of accounting.
In the example below, the general ledger account folio number and name circled in red, and
the balance of the account circled in green, are the elements of information transferred to the
trial balance as shown below. The nature of the balance (debit or credit) determines which
column to use in the trial balance.
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Example Trial Balance
6.2 Correcting errors in trial balance
Steps to take when trial balance does not balance:
• Check that you have transferred each general ledger balance to the trial balance
correctly
• Check that a general ledger account balance was not entered into the incorrect
side of the trial balance
• Check that the journal entries have been entered into the general ledger correctly
Common causes of an unbalanced trial balance
These include:
• A general ledger account balance has been brought forward incorrectly
• A number has a transposition error. This means that the two digits in a number will
have been reversed inadvertently, for example, $847 was entered as $874
o One way to check for a transposition error is to take the larger balance of the
trial balance and subtract away the lower balance of the trial balance, and if
the number will divide equally by nine, then there is a high chance that you
are looking for a transposition error. Using the numbers provided in this
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example $874 - $847 = $27. If we then divide by nine, $27 ÷ 9 = 3, we find the
result is three with no decimal carryover
Modified from: Fresh Books Cloud Accounting, “Accounting Errors: What is a Transposition Error”,
https://www.freshbooks.com/hub/accounting/transposition-error. Accessed on 28/07/2020.
• A general ledger balance entered on the wrong side. To find this kind of error we take
the lower trial balance number away from the higher trial balance number and then
divide by two. If a number is placed on the incorrect side, it is this number that we are
looking for
o Let us assume on our trial balance shown above, the $847 loss on the sale of
the asset was placed on the credit side instead of the debit side. This would
mean that the credit side would be $336,899.59 and if we subtract the debit
total of $335,205.59 we have a difference of $1694 and if we divide this by
two, we find that we are looking for $847
• Calculations for the general ledger balances are incorrect. These calculations should
be checked prior to transfer to trial balance
• A calculation error on the trial balance
Practice exercise 8: Trial Balance
From the General Ledger solution in Exercise 6, complete the trial balance below.
Ensure the totals agree – debits = credits:
Trial Balance
As of 30 June, 20xx Bank
Furniture
Debtors
Creditors
GST Collected
GST Paid
Loan: Global Bank
Capital
Drawings
Sales
Interest Revenue
Rent Revenue
Purchases
Wages
Electricity
Totals
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Practice exercise 8 solution
Trial Balance
As of 30 June, 20xx Bank 3732
Furniture 600
Debtors 544
Creditors 1188
GST Collected 100
GST Paid 164
Loan: Global Bank 500
Capital 4200
Drawings 300
Sales 800
Interest Revenue 12
Rent Revenue 50
Purchases 760
Wages 620
Electricity 130
Totals 6850 6850
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7. Glossary of accounting terms
AASB: Australian Accounting Standards Board.
Account Nature: Refers to whether the account whole is either a debit or a credit nature by
default.
Asset: Items a business owns or controls that will provide a future economic benefit.
Asset Register: Used to record all the details of an asset from its purchase to its disposal.
AUASB: Auditing and Assurance Standards Board.
Bad Debt: A debt owing that that cannot be recovered.
Balance Sheet: A summary of a company’s financial position at a single moment in time.
Cash Payments Journal: A journal that records all cash outflows from the business
regardless of purpose.
Cash Receipts Journal: A journal that records all cash inflows into a business regardless of
source.
Depreciation: A reduction in the value of an asset over time, due to wear and tear and age.
Depreciation Schedule: A table that summarises the annual depreciation claim for each
asset item and each asset group for the purpose of creating the accounting adjustment
journals and the business tax return.
Doubtful Debt: A debt that appears unlikely to be recovered, though all avenues of recovery
have not yet been completed.
End of Period Adjustments: Adjustment is made at the end of an accounting period to
correct for errors or account adjustments that need to be made.
General Journal: is used to record ‘general’ transactions that do not meet the criteria to be
entered into any specialist journals.
General Ledger: is the core of the accounting system and the ultimate destination of the
breakup of all business transactions. It is the general ledger that provides understandable
information to be used in the management processes of a business.
Low-Value Pool: A pooled group of assets costing more than $300 and less than
$1000 tax-exempt that is used to simplify the depreciation process
Prepayment: A payment that is made by the business for goods or services not yet
delivered or used.
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Profit and Loss Statement: A financial statement that reports a company’s trading
performance over a chosen period.
Purchasers Journal: A journal that records all credit purchases made by the business.
Purchasers Returns Journal: A journal that records any returns of purchases made on
credit and recorded on the purchases journal.
Sales Journal: A journal that records all credit sales made by the business.
Sales Returns Journal: A journal that records any returns of sales made on credit and
recorded in the sales journal.
Trial Balance: A form used that lists all debit and credit general ledger account balances for
the purpose of checking for a balance of the accounts.